Greetings, and welcome to Acacia Research Third Quarter Earnings Results Conference Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Rob Fink with FNK Investor Relations. Thank you. You may begin.

Thank you, operator. Hosting the call today are Clifford Press, Chief Executive Officer; Al Tobia, Chief Investment Officer; and Rich Rosenstein, Chief Financial Officer. Before beginning, I would like to remind you that the information provided during this call may contain forward-looking statements relating to current expectations, estimates, forecasts and projections about future events that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to the company's plans, objectives and expectations for future operations and are based on the current estimates, projections, future results or trends. Actual results may differ materially from those projected as a result of certain risk factors and uncertainties. For a discussion of such risks and uncertainties, please see the risk factors described in Acacia's annual report on Form 10-K and quarterly reports on Form 10-Q, both of which are filed with the SEC. I would like to remind everyone that a press release disclosing the company's financial results was issued this morning before the market opened. This release may be accessed on the company's website at acaciaresearch.com under the News and Events tab. With all that said, I would now like to turn the call over to Clifford Press. Clifford, the call is yours.

Thank you, Rob, and good morning, everyone. During the third quarter of 2020, the process of transferring assets acquired from the former Woodford equity income fund continued. As of September 30, 2020, all but four positions have been transferred. At present, two positions remain to be transferred. We will provide an overview of the assets we currently hold and also discuss transactions completed since this acquisition was announced. In addition, there have been some significant changes in valuations for holdings within the portfolio since September 30, and we will discuss those briefly as well. With the Woodford transaction now largely behind us, we are focused on executing the investment strategy that we adopted as the foundation of our strategic alliance with Starboard Value. We believe we have several important advantages, including ready access to committed capital required to execute transactions that we develop, expertise in corporate governance and operational restructuring, which can help us resolve structural impediments to value creation. We are willing to invest in out-of-favor industries or companies that suffer from a complexity discount. Our proven ability to resolve complex multifactor situations can be important as we take advantage of market efficiencies. We intend to acquire operating companies, divisions or other assets where we believe we can realize significant value following an operational or strategic restructuring. Our primary focus is on companies operating in mature technologies, healthcare, industrial, and certain financial services segments. We have been working closely with Starboard Value to evaluate investments and acquisitions based on the criteria I just outlined. It is worth noting that our efforts to make just such an investment led us to the Woodford investment. Our Woodford transaction would not have been possible without steadfast support from the Starboard team and their unwavering financial commitment during the darkest part of the global pandemic sell-off, which is thankfully now well on its way to being resolved.

Thank you, Clifford. This acquisition, which was our first transaction with Starboard Value, was announced on June 5, 2020. It involved Acacia acquiring 18 public and private life sciences companies from the former Woodford equity income fund for a total consideration of $282 million or GBP 224 million. As we have said, this was an opportunistic acquisition, and it was one that came to us as part of our process of identifying and evaluating another potential investment. The assets within this portfolio fell into two categories, twelve public positions, and six positions in private entities. To date, we have sold out of our positions in seven public entities, recovering $181 million in value. We have also sold one private entity for a consideration of approximately $6 million. In aggregate, this means we have recovered $187 million out of the $282 million initial investment, representing two-thirds of our upfront capital. Under GAAP, we record the value of the public holdings at market value as of the end of the quarter. The remaining private assets are held at cost and would be modified in the event of an impairment. If there is an observed transaction or a similar event, we update the value of the holding. To date, only one of our private holdings has had observable transactions since we acquired the portfolio. We have been transferring the securities onto our balance sheet from the seller in a staged process. As of September 30, 2020, two of the private assets had been transferred to Acacia, with one exempted for which we received the cash sale price. In the weeks following the end of the quarter, an additional two positions were transferred. As of September 30, 2020, our balance sheet reflected the following remaining positions: positions in six public entities, Arix Bioscience, a position valued on September 30 at $37 million; Sensyne Health, a position valued at $11.4 million. In the aggregate, these positions in public entities as of September 30, 2020, had a market value of $54.5 million. We also have positions in five private companies, representing an aggregate value at September 30 of $139 million. As a reminder, we carry these positions at cost, net of any impairment, updated only if there has been an observable transaction, such as a primary or secondary sale of shares. We had previously disclosed that one of our private holdings, Oxford Nanopore, completed a secondary transaction in the second quarter, and we are carrying the value at $108 million as of September 30. For the remaining positions, there have been thus far no observable events, meaning these holdings are still valued at cost, which was approximately $31 million as of September 30. So in summary, after initially investing $282 million, we have recovered $187 million and hold public positions worth $54.5 million and private positions worth approximately $139 million. We continue to work on realizing the additional value inherent in these holdings. The largest of the private company investments is a 6% stake in Oxford Nanopore Technologies, an exciting company with disruptive technology in genetic sequencing, applicable to a broad range of applications in both research and commercial markets. As we mentioned in the second quarter conference call, Oxford Nanopore announced a significant new contract with the UK government to provide precise detection of COVID and other pathogens on a rapid basis. We also hold a 5% position in Immunocore, a clinical stage T cell receptor biotechnology company, that is working to develop and commercialize a new generation of transformative medicines to address unmet user needs in cancer, infection, and autoimmune disease. Immunocore has pivotal clinical trials currently underway for its lead program, a potential treatment for metastatic uveal melanoma, a rare form of eye cancer. The company also has a robust pipeline of programs, spanning a broad range of cancer indications as well as infectious and autoimmune diseases. We will soon transfer a 26% position in Viamet, a royalty business in which we are one of the largest shareholders. Our IP business had a very strong quarter, generating more than $19 million in revenue and nearly $5 million in portfolio income. Recently, we purchased an option on a very significant new portfolio that we believe represents an extremely rare opportunity. The IP team has been hard at work with our four previously acquired portfolios, and we are on track to deliver the returns that we anticipated when we acquired these assets earlier this year and late last year.

Thank you, Al. Our book value at September 30 was $202 million or $4.17 per basic share compared to $164.7 million or $3.36 per share at June 30. It's important to note that this book value reflects the GAAP treatment of warrant and embedded preferred liabilities associated with the warrants and convertible preferred stock outstanding. Given the volatility in our share price during the quarter, those warrant liabilities decreased in value during the quarter and are now recorded on our balance sheet at an aggregate value of $74 million. These liabilities reflect the GAAP value of all warrants outstanding as well as the embedded liability in our convertible preferred recognized as noncash liabilities for potential issuance of shares. Upon exercise and/or expiration, these liabilities will be eliminated and reclassified to equity. Given that the warrants and preferred were in the money during the quarter, if these were converted to shares, our fully diluted share count would rise to 90.6 million, with the outstanding notes, preferred, and the liability associated with warrants and preferred eliminated on conversion, meaning book value would rise by nearly $200 million. Pro forma for conversion, our book value would be in excess of $4.40 per diluted share. Since the end of the September quarter, there has been substantial appreciation in the shares of both Arix and Sensyne Health, which have risen in value by $34 million combined. In addition, Oxford Nanopore completed another financing transaction subsequent to September 30 at a valuation that would imply an additional $19 million in value relative to our carrying value at September 30. The combined appreciation in these three positions represents an additional $53 million in value since quarter-end or more than $0.50 per diluted share in additional book value compared to our September 30 book value, which I just outlined. For the quarter, our financial results were as follows: cash and short-term investments totaled $303 million at September 30 compared to $184 million at June 30, $158 million at March 31, 2020, and $168.3 million at December 31, 2019. Debt was $115 million in senior secured notes issued to Starboard. Finally, revenues in the third quarter were $19.5 million. More detail on these results have been made available in the press release issued this morning and also in the upcoming quarterly report on Form 10-Q, which we will file with the SEC later today. As we discussed in the call after the June quarter, during the process of transferring assets from the Woodford acquisition, we have line items for escrow and for derivative assets on our balance sheet. The last of these transfers are expected to be completed shortly, which means our December balance sheet should no longer reflect these line items going forward.

Thanks, Rich. When we announced the strategic partnership with Starboard, we indicated that we had retained the right to offer existing Acacia common stockholders the opportunity to purchase up to $100 million in senior secured notes and warrants to purchase -- with warrants to purchase up to 27 million shares of common stock on substantially the same terms as Starboard. To facilitate this initiative, we are filing a shelf registration statement on Form S2 with the SEC to facilitate a rights offering and provide flexibility to the company. In addition, Acacia continues to execute on its investment strategy. We have already created significant value from our IP assets and the Woodford transaction. Our remaining holdings are patents and companies where we believe there is additional value to be realized. The result is a significant improvement in our book value and a strong balance sheet from which we can make additional investments. Our flexibility remains a key asset in today's challenging economy. Together with Starboard, we are well positioned to pursue strategic transactions of greater scale and flexibility. We are now happy to answer questions.

[Operator Instructions] Our first question is from Anthony Stoss with Craig-Hallum.

Tough question, maybe you can't say too much. But Clifford, I'm curious if you could comment about just the activity level going, looking for an operational acquisition, if you've had companies that you've been outbid on or if there's a number of companies on the short list? Just give us a sense of kind of what's been going on over the last 6 months? And maybe any sense of timeline going forward?

We're happy to talk about it. Unfortunately, we don't have anything that we can announce at the moment. The nature of our business is that we look at public companies and we need to make progress on the investment before we can say anything publicly. But I would say that this is an area where, obviously, our partnership with Starboard has been particularly helpful. We have a number of very good projects in the queue, and we expect to be quite busy in the coming year.

Okay. And then another question that I'm not sure you can fully detail, but I'm curious if -- you've mentioned Oxford here several times today, again, have you been approached? Has there been a willingness for outsiders to bid on any of the private companies that you guys have, aside from the one you sold for $6 million?

These are -- Oxford, in particular, are positions that are very well understood even though they're private, particularly in the U.K. market, and there is a substantial amount of interest in Oxford Nanopore. It's something of a British unicorn. We are confident in the value that we hold in that business, and we think there's substantial additional upside. The other companies are in various stages of achieving commercial endpoints. I think that what I would say about these investments in this portfolio is because of the nature of what we bought, we bought a portfolio that has been in development for a long period of time. In some cases, these positions have been built by the Woodford team over 10 or 12 years. What we acquired were very late-stage investments. Most of them are within 1 or 2 years of commercial inflection points. So there are substantial opportunities to achieve liquidity on these relatively short term. But Oxford, since you asked about it, is one that is particularly in demand.

Right. And then if I may direct a couple of questions to Rich. On the $19 million in IP revenue that you booked in the quarter, can you share any more detail what market was that, etc.? Was that a one deal, more than one deal? And then kind of your thoughts on operating expenses for the December quarter and going forward?

Sure. So there -- in the quarter, we had a substantial settlement on one of our portfolios. There -- in connection with that revenue, there can be revenue shares with either contingency fees or royalties that we share with the inventor-owner of the patents, as the case may be. So part of the reason you may have seen our operating expenses increase in the quarter was in connection with that revenue. I would say that excluding portfolio expenses, sort of operating expense excluding success-based revenue and expense is running at about the same level as it has been. It's not changing substantially in the fourth quarter.

[Operator Instructions] Our next question is from Brett Reiss with Janney Montgomery Scott.

Congrats on a lot of the progress. Could you refresh my recollection? And I think some people on the call, what are the terms of the notes and the warrants that ultimately we'll be able to participate in the rights offering?

I'll just update you on that, Brett. They are 6% notes, convertible, and the warrants allow the notes to be exchanged for stock at an exercise price of $3.65 per share.

Okay. Now at some point, will the warrants detach from the notes and do you anticipate a trading market in the warrant?

Well, it's hard to do -- it's not a cash exercise of a warrant. So you can't buy it and -- as a separate instrument and exercise it for cash. You can only exchange it for a note. So I don't think it would make sense to separate it.

Okay. Okay. You mentioned in your introductory comments that the IP portfolio is generating the anticipated returns you're looking for. Can you share with us what -- every dollar spent on IP is? What are the anticipated returns you're looking for?

Al, why don't you take that one? Because, Brett, the IP -- when we got started quite some time ago, you've been involved in the story since the beginning. We felt that the IP environment was improving and improving substantially, and we continue to see evidence of that. I will describe some of it.

Great. So I guess, Brett, every investment has to stand on its own merit. So there isn't really a hard and fast rule, right? If you're looking at a portfolio that's litigation-heavy, and you're going to need to put capital into it and if it has fewer outcomes, you'll obviously look for a higher dollar -- per dollar invested return. If you're buying a portfolio that is more of a soft licensing portfolio with a broader set of outcomes, you may be able to risk-adjust that and look for a lower return necessarily. I would say that if you look at the portfolios we purchased there, a broad group of portfolios, they have a blend of very good licensing opportunities as well as litigation opportunities. Recent events that we've seen, some very large awards given out and the level of activity in the business, we feel like we're well positioned now to capitalize on those, but I wouldn't want to get into specific amounts because each one is different.

Okay. I appreciate that. Now if ultimately, we're able to sell the remaining Woodford portfolio at a huge gain, is the nature of that gain such that that will be sheltered by the net operating loss carryforward that the company enjoys?

Yes, I'll take that. Yes, it would be sheltered by the net operating loss carryforward, as well as we have capital loss carryforwards as well. But yes, that's correct.

All right. So I'll let that be it for now. And one final one. With the change -- it looks like Biden is going to be the President, do you see that changing the tones and regulatory landscape with respect to the PTAB Board? And the interplay between what happens at the PTAB Board and cases that go through the regular channels and the courts?

It's a very complicated question, Brett, and probably not one that we should delve into here. I think we'll be doing a shareholder presentation in general and cut it fairly shortly, and we'll have some updates on our view of the progress in the IP protection market.

Well, I guess one final one because so many good things are happening, will we see more kind of outreach to the investment community to help the price of the stock?

Well, we've always been very open to explaining everything in the company to our investors in terms of marketing. We will be more visible, I think, at some conferences, whatever it was used going forward. And as soon as we have more of a story to tell, we'll be happy to do that.

There appears to be no more additional questions. We have reached the end of today's call. You may disconnect your lines at this time, and thank you for your participation.